Moody’s Investor Service dropped the bond ratings of Chicago Public Schools and the Chicago Park District to junk a day after it did the same for the city of Chicago.
For CPS, the downgrade doesn’t trigger any new payments to financial institutions, but the worsening of CPS’ ratings could potentially affect negotiations the district has entered into with several banks over those “swap” termination fees.
Moody’s dropped CPS’ rating three notches to Ba3 from Baa3, with a continuing negative outlook. The Chicago Park District saw the same three-notch slide to Ba1 with a negative outlook.
CPS’ rating, which determines its borrowing costs, applies to $6.2 billion in general-obligation debt; the park district’s rating to $616 million in general-obligation debt.
Moody’s blamed CPS’ “steadily escalating pension contributions and use of reserves to fund those contributions.”
“We believe pension costs will place increasing strain on the district’s precarious financial position” absent new revenue or cuts, “both of which appear increasingly difficult for the district to achieve,” it wrote of CPS.
As for the Park District, it said, “We perceive increased risk that the city’s intensified pressures will adversely affect CPD’s [Chicago Park District] financial operations and position.”
The Chicago Park District says it strongly disagrees with the downgrade and Moody’s assessment that the park district has governance ties to the city. The park district has operated as its own entity for 81 years. It also has its own pension reform that went into effect in January and allows for any source of revenue to make its contributions rather than rely on just property taxes.
The park district’s pension reform, unlike the state, requires significant contributions by the park district — $12.5 million in 2015 and 2016, and $50 million in 2019.
“The Chicago Park District has done everything that Moody’s has asked — we have structurally balanced our budget each year and maintained healthy reserves; we passed pension legislation that balances reform with revenue and has not been contested; we have responsibly increased property taxes; and the bonds that they rated are bolstered with dedicated revenue streams larger than are needed to make interest payments,” park district spokeswoman Jessica Maxey-Faulkner said.
Moody’s cited the state Supreme Court’s ruling Friday overturning of state pension reforms as unconstitutional for all the downgrades, saying CPS and the park district are running out of options to reduce pension liabilities.
CPS interim CEO Jesse Ruiz repeated Mayor Rahm Emanuel’s mantra Tuesday that Moody’s unfairly targeted CPS but didn’t touch the state’s rating in the wake of the Supreme Court’s ruling. Ruiz said the downgrade “does reaffirm why we must address Chicago Public Schools’ urgent financial crisis and finally bring equity to Chicago Public Schools and our city’s taxpayers.”
Ruiz chalked up $700 million of the district’s projected $1.1 billion deficit to pension costs.
“This crisis is now at our classroom doors, and we urge Springfield to prioritize education funding and end the broken pension system that forces Chicago taxpayers to pay twice for teacher pensions,” he said.
Neither downgrade Wednesday came as a surprise given that Moody’s also downgraded the city’s debt to junk status Tuesday.
Moody’s wrote that the “magnitude of the budget adjustments” needed to solve the $30 billion total pension crisis at the city and schools is “significant,” and Chicago’s tax base is already on the hook for them, the agency said.
The city’s rating applies to $8.1 billion in general-obligation debt, $542 million in outstanding sales tax revenue debt and $268 million in outstanding and authorized motor fuel tax revenue.
On Tuesday, Emanuel had denounced the rating agency as “irresponsible” for playing “politics with Chicago’s financial future by pushing the city to increase taxes on residents without [pension] reform.”
The mayor acknowledged Chicago’s financial crisis is “very real and at our doorsteps.” But he called the Moody’s double-drop “irresponsible,” “far beyond reality” and “out of step with other rating agencies — by as many as six steps.”
On Wednesday, Civic Federation President Laurence Msall called on the city to come up with a short- and long-term plan to restore Chicago’s bond rating to investment grade level.
And the Chicago Teachers Union accused Emanuel of ignoring their pitches for new revenue sources.
“The downgrade is an example of how the rating agencies work in concert with bondholders in pushing our city and schools to the brink by recklessly increasing termination fees and costs of borrowing,” CTU spokeswoman Stephanie Gadlin said. “Today’s action by Moody’s induces further political panic to force the city to implement even more misguided fiscal decisions that will hurt our students and public schools.”
In March, Moody’s dropped CPS to a Baa3 rating — one level above junk status — on the board’s general-obligation debt. Two weeks later, a three-notch drop by Fitch Ratings to BBB with a negative outlook triggered termination clauses in debt “swap” deals with banks that put CPS on the hook potentially for $263 million in penalties. Chicago school officials told federal regulators in filings that their liability was less — more like $228 million.
CPS spokesman Bill McCaffrey said at the time and repeated Wednesday that the district was in talks with the financial institutions to renegotiate the terms of the deals.
Contributing: Fran Spielman